Feed In Tariffs

Background

The Feed in Tariff (FIT), also known as “clean energy cash-back” has been introduced by the UK Government to encourage the installation of low carbon electricity generation equipment, the most popular of which will be Solar Photovoltaic panels (Solar PV).

It is expected that by 2020 the scheme will support over 750,000 small scale installations and will have saved seven million tonnes of carbon dioxide. The scheme rewards individuals, communities and businesses that invest in this technology and thereby contribute to reducing the countries carbon footprint and increasing our energy security.

Solar PV has for a long time been considered an expensive solution with payback periods of forty years being common. However, with the introduction of the FIT scheme this payback can be reduced to approximately ten years making it not only affordable but also desirable, especially when you consider that the payments are index linked and tax free.

The Facts

The UK Government are not only interested in the amount of low carbon electricity generated they also want to change the way we think about energy, with a view to reducing the amount we consume in our homes, offices and communities.

1. The FIT will become effective from the 1st April 2010 and payments will be made for 25 continuous years from the initial start date. For example if you started FIT in April 2010 your last payment would be made in March 2035. If you started in April 2015 your last payment would be March 2040. After this period you continue to enjoy free electricity.

2. Income from FIT for domestic homes generating electricity mainly for their own use will not be taxable income for the purposes of income tax.

3. All FIT rates are linked to the Retail Price Index (RPI) ensuring that the savings projected maintain their current value, safeguarding them against general inflation.

4. By installing Solar PV and generating your own electricity you will also be taking steps to safeguard against energy inflation which on average has increased nearly 10% over the last eight years.

5. Installing Solar PV will also provide you with security of electricity supply, which is forecasted to be a major problem over the coming years.

6. The initial FIT rates have been fixed until March 2012. Each following year the rates will significantly fall, this is called degression (see section below). This is a standard mechanism and is designed to: 
                                          6.1. Encourage and reward the early adopters. 
                                          6.2. Reflect the anticipated falling costs of equipment and installation due to volume increases.

7. The scheme will be managed and payments made by the largest energy companies operating in the UK. It will mandatory for all the major energy companies to offer FIT’s but smaller suppliers will have the option to participate.

8. The scheme is funded by a small charge levied by the energy companies on all bills sent to all households in the UK. That means that if you do not install a low carbon electricity generating technology you will be making a small contribution each month to someone else who does.

9. The scheme will apply across England, Scotland and Wales only.

The Tariff Rates

The FIT will consist of two elements of payment:

The first element:
Is a generation tariff which differs by size of installation and is paid for every kilowatt hour (kWh) of electricity generated and metered by your Solar PV panels (see rates below). This generation tariff will be paid regardless of whether the electricity is used onsite or exported to the National Grid.

The second element:
Is an export tariff which is consistent across all sizes of installation and is set at 3p per kWh of electricity exported to the National Grid. For larger installations this will be metered, but for domestic installations this will be assumed to be a fixed proportion of the total generation in any period without the need of additional metering.

Therefore a FIT’s generator may use electricity generated onsite, thereby avoiding having to purchase that electricity from the National Grid, or they may export their generation directly to the National Grid.

FIT Rates

How much can you generate?

It is important to note that most domestic generators will not be able to generate enough electricity to cover all their electricity needs. This is for two main reasons:

1. The roof size will restrict the amount of Solar PV panels that can be fitted and therefore limits the amount of electricity that can be generated.

2. Solar PV panels generate electricity during daylight hours only and households use electrical appliances during the night.

As a result most households will export excess electricity during the day and draw some electricity from the National Grid at night. Clearly there is a great opportunity to maximise the benefit of FIT by planning a greater level of consumption during the day, when the generated energy is free, for example using the washing machine or the dishwasher.

The Financial Benefit

The best way to explain this is to use a worked example to show the financial benefit gained by installing a Solar PV system. The project will involve installing a Solar PV system onto an existing house (retrofit).

Current situation pre-installation of Solar PV system  
Annual electricity drawn from the National Grid: 4,500 kWh
Rate paid per kWh for electricity drawn from the National Grid: 0.12p
Annual bill for electricity drawn from National Grid: 4500 X 0.12p = ВЈ540
Post-installation of Solar PV system  
Install a 3 kWp Solar PV system (see note above on limitations)  
Electricity generated from the system (see below): 2,550 kWh
Generated electricity used onsite (example - 60%): 1,530 kWh
Generated electricity exported (example - 40%): 1,020 kWh
Benefits of installing a Solar PV system  
Your current position  
A. You current cost of electricity drawn from the National Grid ВЈ540
Your position after installing Solar PV  
B. Generation tariff: 2,550 X 41.3p = ВЈ1053
C. Export tariff: 1,020 X 3p = ВЈ31
D. Annual Cash Benefit B + C = ВЈ1,084
E. Savings on generated electricity used on site: 1,530 x 0.12p = ВЈ184
F. The electricity still needed to be drawn from the National Grid: (4,500 - 1,500) x 0.12p = ВЈ356
G. Annual Gross Benefit D + E - F = ВЈ912

Annual Nett Benefit

This is the difference between your starting point your current electricity bill (A = - ВЈ540) and your finishing point (G = + ВЈ912) ВЈ1,452.

Cost and Payback

If we said for example that a 1kWp system would cost ВЈ5,000 installed. Therefore the total cost for the system used in our example would be ВЈ15,000 resulting in a payback period (ВЈ15,000 / ВЈ1,452) of 10 years and a return on investment (ROI) of approximately 10.7%.

Solar PV - The Difference Between kWp and Output in kWh

In order to enable performance comparisons to be made between the various types and manufactures of Solar PV panels a system measuring a panels output under strict test conditions was established. The output of a panel in these conditions is measured in kWp units. In simple terms a 1kWp panel system provides an annual output equal of 1,000kWh. 

However, the output of a panel in the “real world” is dependent on many factors for example, the geography of where it is mounted and it’s ordination to the sun. For example, a 1kWp panel installed in Australia will provide a greater output than the same panel situated in Scotland. In the same way a panel installed on a southerly orientation to the sun will provide a greater output than one fitted with a northerly orientation to the sun. There is a standard measuring system adopted in the UK to take into account both of these plus other important factors when determining the output of a Solar PV system.

Degression Rates

“Degression” is where tariffs for new installations are set at a lower level each year than for installations made in previous years. This is to reflect, encourage and drive, decreases in technology and installation costs. It is also a mechanism to reward early adaptors. The way the scheme works is as follows: Any eligible installation will be allocated a generation tariff according to the table of tariffs below. This is the generation tariff that would apply to generation from that installation for the life of the tariff (subject to alterations as a result of indexation).

When tariffs are degressed, they are only applicable to new installations from that point forward. So tariffs paid to existing generators at that time are not affected, only tariffs allocated to new installations from that date. An installation in 2010 will receive the 2010 tariff for its lifetime, for example a less than 4 kWp retrofit would receive 41.3p. An installation in 2015 will receive the 2015 tariff for its lifetime, for example a less than 4 kWp retrofit would receive 28.8p. The export tariff is not affected by degression and remains at 3p regardless of the date of installation.

  2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Less than 4 kWp New Build  36.1 36.1  33  30.2  27.6  25.1  22.9  20.8  19  17.2  15.7 
Rate Reduction (pence / kWh)  n/a  n/a  3.1 2.8  2.6  2.5  2.2  2.1  1.8  1.8  1.5 
Degression rate %  n/a  n/a  8.58 8.48  8.61 9.06  8.76  9.17  8.65  9.47  8.72 
Less than 4 kWp Retrofit  41.3 41.3 37.8  34.6   31.6 28.8  26.2  23.8  21.7  19.7  18 
Rate Reduction (pence / kWh)  n/a  n/a  3.5 3.2  3.0  2.8  2.6  2.4  2.1  2.0  1.7 
Degression rate %  n/a  n/a  8.47 8.47  8.67  8.86  9.03  9.16  8.82  9.22  8.63 

NB - All degression years operate April to April e.g. April 2010 to April 2011

Steps to Take From Here

Each Solar PV system is a bespoke solution based on the project requirements. At SIG Sustainable Solutions we have access to an extensive range of Solar PV panels to enable us to find the right solution to suit your particular project. Our experienced team will take you step by step through the process; from establishing your initial needs right through to developing the specification and installing the most appropriate solution.

For more information or if you have any questions please email us or call on 0845 873 8612.